The US dollar continued to decline on Tuesday and during the Asian morning Wednesday, as risk appetite remained supported after EU leaders struck a deal over an economic-recovery fund, with positive headlines surrounding a potential vaccine adding further fuel to the overall optimism. As for today, the most important data set on the economic agenda is Canada’s inflation numbers for June.
The US dollar continued to trade lower against all the other G10 currencies on Tuesday and during the Asian morning Wednesday. It lost the most ground versus AUD, NOK, SEK, and NZD in that order, while it underperformed the least against JPY, GBP and CAD.
The weakening of the safe-havens dollar and yen, combined with the strengthening in the risk-linked Aussie and Kiwi, suggests that financial markets continued trading in a risk-on fashion. Indeed, turning our gaze to the equity world, we see that major EU indices closed in positive territory, while in the US, both the S&P 500 and the DJIA gained 0.60% and 0.17% respectively. The exception was Nasdaq, which slid 0.81% as investors sold the spectacular tech rally that led the index to a new record yesterday. The relatively upbeat investor morale rolled somewhat over into the Asian session today as well. Although Japan’s Nikkei fell 0.52%, China’s Shanghai Composite is up 0.87%.
Following headlines of progress, EU leaders finally managed to secure a deal over a EUR 750bn recovery fund to support their coronavirus-hit economies, which may have been one of the main drivers behind the latest improvement in risk appetite, alongside positive news with regards to vaccine trials. Although, as we noted yesterday, both the bulls and the bears have ample reasons to jump into the action, it seems that those who believe in an faster-than-previously-thought economic recovery are having the upper hand at the moment, despite both infected cases and deaths from the coronavirus accelerating again yesterday.
In our view, the next catalyst for the broader investor appetite may be the US Congress’s decision over a new fiscal relief package, with less than two weeks to go before the extended unemployment aid for millions of Americans expires. Republicans and Democrats remained far apart yesterday on how much to spend, with House Speaker Nancy Pelosi saying that the USD 1trln package proposed by the Republicans is not sufficient. With that in mind, any final decision above that number may add further fuel to the broader optimism, and perhaps lift stocks and other risk linked assets higher. Consequently, the safe-havens dollar, yen and franc are likely to stay pressured.
Yesterday, NZD/JPY broke its key resistance barrier, at 70.71, marked by the highs of July 7th, 9th and 13th. This way, the pair broke above the previous high of July and formed a new one. But the rate continues to climb higher, which suggests that the pair is not done with establishing a July’s high yet. In addition to everything discussed above, the rate is still balancing above a short-term upside support line drawn from the low of June 21st. For now, we will stay bullish and aim for some higher areas.
A further push north could bring USD/CAD closer to the 71.28 zone, which is the high of June 9th, where the pair might get a temporary hold-up. If initially the rate finds it difficult to overcome that zone, it may correct slightly lower, possibly moving back to the previously-mentioned 70.71 area. However, if the pair remains above the aforementioned upside line, the bulls could take advantage of the lower rate and lift it up again. If this time the 71.28 barrier fails to withstand the bullish activity and breaks, that would confirm a forthcoming higher high and may open the door for a test of the highest point of June, at 71.66.
In order to examine the downside, a break of the aforementioned upside line would be needed. If that happens and the rate also slides below the 70.23 area, marked by an intraday swing low of July 20th, NZD/JPY might fall to the psychological 70.00 zone, where it may get a temporary hold-up. That said, if the pair is still struggling with finding a good support, the slide could continue, where the next potential target could be at 69.81. That level marks the low of July 14th.
As for today, the most important data point on the calendar is Canada’s CPIs for June. The headline rate is forecast to have rebounded to +0.3% yoy from -0.4%, while no forecast is available for the core rate which in May stood at +0.7%. That said, with the yoy rate in WTI improving during the month of June, if the headline rate is set to rebound as much as the forecast suggests, the core one is likely to rise by less.
In any case, at last week’s gathering, the BoC kept its policy unchanged, and although officials noted that interest rates will stay untouched until the 2% inflation target is sustainably achieved, they added that they stand ready to adjust their programs if market conditions change. With retail sales for May rebounding by less than expected yesterday, it may need a decent improvement in inflation for BoC officials to stay comfortably on the sidelines for another gathering.
With regards to the broader outlook of the Loonie, we remain somewhat positive, especially after yesterday’s jump in oil prices to a new 4-month high. That said, we prefer to exploit any further CAD gains against safe-haven currencies, like the US dollar and the yen, which tend to underperform during periods of market optimism.
Yesterday, USD/CAD broke below its key support area, at 1.3488, which was also acting as the lower bound of the short-term range, which was in play from around the beginning of July. The pair drifted lower, but found a new decent support zone near the 1.3437 hurdle, marked by the inside swing high of June 10th. Nevertheless, the near-term outlook seems to be bearish for now, hence why we will aim for slightly lower levels overall.
Even if we see the rate rebounding a bit higher from that 1.3437 mark, but remaining below the aforementioned lower side of the range, at 1.3488, the bears may stay active. If the bears manage to get upper hand, USD/CAD might be forced to drift down again to the 1.3437 zone. This time, if the rate strongly pushes below that area, the next possible support level to consider could be at 1.3353, marked by an intraday swing low of June 10th.
On the upside, a rate-rise back above the previously-discussed 1.3488 barrier, would place the pair back into the aforementioned short-term range. We may start aiming for higher levels within that range, if USD/CAD makes its way above the 1.3516 zone, marked by intraday swing highs of July 16th and 21st. That’s when more bulls might jump in and drive the pair to the 1.3565 obstacle, or even the 1.3600 area, which is the high of July 20th. The pair could stall there for a bit, but if the buying-interest is still there, the next potential resistance level could be at 1.3626, marked by intraday swing highs of July 10th and 14th. In addition to that, it’s the upper bound of the aforementioned range.
Apart from Canada’s CPIs, we also get the EIA (Energy Information Administration) weekly report on crude oil inventories for last week. The forecast is for a 2.088mn barrels slide, after a 7.493mn tumble the week before, but bearing in mind that the API report revealed a 7.544mn barrels inventory build, we would consider the risks surrounding the EIA forecast as tilted to the upside. The US existing home sales for June are also coming out, and the consensus is for a 24.5% mom rebound after a 9.7% slide in May.
We also have one speaker on today’s agenda, and this is, once again, ECB Vice President Luis de Guindos.
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